Forecasts from Reduced-form Models under the Zero-Lower-Bound Constraint

Mehmet Pasaogullari

No 1512, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: In this paper, I consider forecasting from a reduced-form VAR under the zero lower bound (ZLB) for the short-term nominal interest rate. I develop a method that a) computes the exact moments for the first n + 1 periods when n previous periods are tracked and b) approximates moments for the periods beyond n + 1 period using techniques for truncated normal distributions and approximations a la Kim (1994). I show that the algorithm produces satisfactory results for VAR systems with moderate to high persistence even when only one previous period is tracked. For very persistent VAR systems, however, tracking more periods is needed in order to obtain reliable approximations. I also show that the method is suitable for affine term-structure modeling, where the underlying state vector includes the short-term interest rate as in Taylor rules with inertia.

Keywords: monetary policy; forecasting from VARs; zero lower bound; normal mixtures (search for similar items in EconPapers)
JEL-codes: C53 E42 E43 E47 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2015-08-05
New Economics Papers: this item is included in nep-ecm, nep-for and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1512

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DOI: 10.26509/frbc-wp-201512

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